Oil price rallies as U.S. threatens Iraq

Once again, a standoff between Presidents Bill Clinton and Saddam Hussein has bolstered oil prices in an otherwise stagnant crude market. As the U.S. threatened Iraq with military action, in response to continued Iraqi disruption of the work of United Nations weapons inspectors, speculators covered their short positions in the oil market. This latest diplomatic showdown brought the price of crude back from a 4-year low, in spite of low U.S. demand, a mild winter, and oversupply in the market

Feb. 2, 1998

3 min read

David Knott
Senior Editor

Once again, a standoff between Presidents Bill Clinton and Saddam Hussein has bolstered oil prices in an otherwise stagnant crude market.

As the U.S. threatened Iraq with military action, in response to continued Iraqi disruption of the work of United Nations weapons inspectors, speculators covered their short positions in the oil market.

This latest diplomatic showdown brought the price of crude back from a 4-year low, in spite of low U.S. demand, a mild winter, and oversupply in the market (OGJ, Jan. 12, 1998, p. 22).

Brent crude oil for prompt delivery rose 95¢ during London trading on Jan. 27, to close at $15.74/bbl. On the same day, Brent crude for March delivery rose 96¢ to close at $16.11/bbl. Yet on Jan. 22, prompt Brent had fallen 38¢ during the day to close at $14.39/bbl, while March Brent fell by the same amount to close at $15.04/bbl. This marked the lowest Brent price since April 1994.

The low point was a result of growing speculation that the United Nations intended to relax its ban on oil exports so that Iraq could earn more money to pay for humanitarian relief.

At the same time, traders remain concerned that Saudi Arabia is planning to produce more than its recently raised Organization of Petroleum Exporting Countries production quota of 8.76 million b/d.

Familiar patterns

The U.S.-Iraqi standoff that triggered the rise followed a familiar pattern: Baghdad ignoring international pressure and preventing the work of U.N. teams in Baghdad to catalog Saddam's arsenal.

Iraqi newspapers accused the chief weapons inspector, Richard Butler of Australia, of following U.S. orders and of the U.S. administration trying to deflect attention from the sex scandal currently engulfing Clinton.

Meanwhile, the U.K.'s Invincible aircraft carrier joined similar vessels USS Nimitz and USS George Washington in the Arabian Gulf, while diplomats predicted Saddam would be given an ultimatum to comply with weapons inspections before an attack would be launched.

Also continuing a familiar pattern, Russia, which along with France and China has lined up giant oil field projects in Iraq for when U.N. sanctions are raised, tried to calm things down.

Moscow sent a special envoy to Baghdad to try to prevent military action, while Russia, China, and France backed Iraq's move to reduce the domination of weapons inspection teams by U.S. participants. They offered to send some of their own experts to join the weapons teams.

In his state of the union address on Jan. 27, Clinton warned Saddam: "You cannot defy the will of the world. You have used weapons of mass destruction before. We are determined to deny you the capacity to use them again."

Fundamentals unchanged

Geoff Pyne, oil market analyst at UBS Ltd., London, said that, while traders' determination to cover themselves on near-term deals was not totally illogical, the threat of military action by the U.S. does not immediately change the current supply/demand picture.

However, "the threat of military action introduces a huge amount of uncertainty to the market," said Pyne. "It also makes the future of the U.N. oil-for-food deal uncertain.

"If the U.S. is going to have military action, U.N. could not have its aid distribution teams on the ground. It could be that the oil-for-food deal, which was supposedly going to be increased, could instead be stopped. This is why the oil price rallied."